Credit-ratings companies face direct supervision from a single European market regulator under proposals from the European Commission to be announced as early as next week.
A regulation to “hand power of supervision of credit- rating agencies to the European Securities and Markets Authority” will be announced “very shortly,” David Wright, deputy director general for financial services at the commission, said in a speech in Brussels today. The commission will also seek comments on plans to impose tougher governance rules on banks, he said.
Scrutiny of credit-ratings companies intensified after Greece’s rating was cut to junk status by Standard & Poor’s. The downgrade added urgency to European plans to bail out the debt- plagued nation. Regulators have also blamed poor governance procedures in banks for the risk-taking behavior that contributed to the credit crisis.
Corporate governance is often ignored, Wright said. “We could have perfectly good capital requirements but some lunatics in charge, we could have weak boards, we could have risk committees that don’t exist,” he said. “We think that is unacceptable.”
The commission drew up proposals for Europe-wide supervisors for the banking, securities and insurance industries in September in response to the worst financial crisis since World War II.
The law would see the Committee of European Securities Regulators take on more powers at the start of next year and change its name to the European Securities and Markets Authority, or ESMA.
The commission may face legal challenges to its proposal to give ESMA the powers over credit-ratings companies, Michel Petite, former head of legal services at the commission and now a regulatory lawyer at Clifford Chance, said in a telephone interview from Paris today.
There is European case law to suggest “discretionary powers cannot be given to an agency,” said Petite. “ESMA will be given powers which far exceed the powers ever given to an EU agency.”
Jessica Sibado, a spokeswoman for Moody’s Investors Service couldn’t be immediately reached for comment. Mark Tierney, a spokesman for Standard & Poor’s, and Julian Dennison, a spokesman at Fitch Ratings, declined to comment.